Dairy Talk

Jim Dickrell is the editor of Dairy Today and is based in Monticello, Minn.

Better Dairy Solutions

Aug 15, 2011

Policy set at the national level cannot be nuanced enough to address and protect every regional issue. What it can do is position the U.S. to become a more consistent player in global dairy markets.

National Milk’s 12-city roadshow for its Foundation for the Future (FFTF) dairy reform package will wrap up next week in Nashville.

While I was only able to attend one of the meetings, reports were that producers were filtering the program through some pretty near-sighted lenses.

Most of this criticism misses the bigger picture. Like it or not, any dairy reforms will have to prove their mettle against 2009. With some 11% of U.S. milk solids going off-shore in 2008, a 25% decline in exports meant 2% to 3% more product was left in U.S. warehouses. The consequence: a 30% decline in milk prices.

The criticisms of FFTF, and Rep. Collin Peterson’s (D-Minn.) draft proposal that mirrors it, seem to have little to do with averting another 2009 dairy meltdown.

Instead, some in the West say the margin protection portion of the plan doesn’t reflect local (higher) feed prices, and therefore doesn’t protect Western producers to the same degree as areas with lower feed prices.

That’s all well and good—but how do you have a national program when one region of the country would trigger margin protection while the rest of the country would not? More importantly, how do you pay for regional margin protection insurance when the program is already struggling to come in under baseline?

Some in the Midwest oppose the market stabilization portion of the program because it may limit expansion when the Midwest now has a comparative advantage. But without the stabilization component, costs of the margin protection insurance portion of the program skyrocket out of control.

One solution would be to cap the margin protection portion similar to the MILC limits. But that’s déjà vu all over again, pitting small producers against large.

Others oppose the proposed Federal Order changes, saying the competitive pay price scheme for determining cheese prices will ultimately lead to higher Class I prices. Those higher prices will lower Class I sales, making Class I milk a surplus, which will, in turn, lower Class III prices. Well, maybe.

University of Wisconsin dairy economist Mark Stephenson says a 50¢ increase in Class III prices (from the proposed competitive pay price survey) would result in about a 7¢ increase in the All-Milk price. This would stimulate more milk production but also induce a “modest decline in Class I sales,” he says. “That ultimately lowers cheese prices and Class III prices by at 12¢.

“Our previous analyses [of the other components] of the FFTF program was price enhancing for Class III, so these two effects would be somewhat offsetting,” says Stephenson.

The message in all of this is that policy set at the national level cannot be nuanced enough to address and protect every regional issue. Dairy producers will have to continue to do their own risk management.

What national policy can do is position the U.S. to become a more consistent, reliable player in global dairy markets. Maintaining and growing our ability to export one of every seven or eight pounds of milk solids through thick and thin is critical.